Texas Shareholder Rights

Corporations and limited liability companies formed under Texas law (through the Texas Secretary of State) are subject to Texas law when it comes to the relationships between the corporation, its officers, its directors, and its shareholders or members. Under Texas law, the shareholders of a corporation — even a minority shareholder holding as little as one share — have rights. Which makes sense, when you consider that each shareholder owns a piece of “property” — the shares in the corporation. As the owner of the shares, the shareholder can:

1.Examine the books and records of the corporation.

Any shareholder has the right to examine the books and records, provided that the shareholder either has owned stock in the corporation for at least six months or owns 50% or more of the outstanding stock. The term “books and records” encompasses:

  • The basic accounting records
  • The minutes of all meetings of shareholders or directors or official committees
  • The current list of the names and addresses of all shareholders
  • Any other records that the corporation is required by law to keep.

Disputes over the examination of a corporation’s books and records usually arise when the corporation wants to limit the examination to the financial statements (usually a two or three-page document), but the shareholder wants to examine all of the detailed invoices, checks and accounting records. The law is somewhat murky on how far the shareholder’s rights extend, but the vast majority of courts recognize that the right to examine books and records goes well beyond a simple financial statement. Some courts have interpreted this right to extend to all documentary or electronic information in the possession of the corporation, including contracts, correspondence, and all documents relating to the affairs of the corporation. If legal action is necessary to force the corporation to allow the inspection of the books and records, the shareholder may be able to recover his or her attorney’s fees.

2.Get the shareholder’s proportionate share of profits, when the corporation’s directors choose to distribute profits as dividends.

Unless a corporation has separate classes of stock (such as preferred stock and common stock), then dividends — once declared — must be paid proportionately to all shareholders. If the governing directors and officers also own a majority of the shares in the corporation, they may try to circumvent this basic shareholder right by distributing the corporation’s profits to themselves in the form of bonuses or salary increases, or through reimbursement of personal expenses under the guise of corporate expenditures or marketing. While the payment of bonuses are generally left to the discretion of the directors, when those bonuses become excessive (compared to the compensation paid to officers of similar companies who are not also shareholders), the minority shareholder may be able to challenge the characterization of the distribution, and force the payment of dividends.

3. Insist upon an annual meeting of the shareholders.

Virtually every set of corporate by-laws require the corporation to hold annual meetings. In practice, however, many closely-held corporations overlook this requirement, since the controlling shareholders are often directing the day-to-day operations of the corporation. When this occurs, a shareholder should send a written request to the corporation that an annual meeting be held. If the corporation refuses to comply, the shareholder can seek a court to order that the meeting be held.

4.Insist that the corporation issue and register the shares in the shareholder’s name.

In small corporations, it is not uncommon for the organizers to overlook the formality of issuing the actual stock certificates and updating the formal registry of stock ownership after shares are bought or sold. In most cases, this failure to follow the formalities has little consequence. However, when a corporation is mired in controversy, it becomes imperative for a shareholder to ensure that his stock ownership is evidenced by a stock certificate and properly recorded in the corporate records. Without it, the shareholder may not be able to prove his or her right to petition a court for help, and the shareholder might not receive timely notice of important corporate events. Additionally, without a properly executed stock certificate, the shareholder may be unable to sell the shares.

5.Force the distribution of dividends if the director’s refusal to declare dividends is made in bad faith or has no reasonable justification.

Under the “business judgment rule,” courts generally defer to the judgment of a corporation’s governing directors to decide whether it is in a corporation’s best interest to build up its balances of cash and other assets, rather than declare a dividend to distribute profits. Many times, the decision not to pay dividends makes perfect sense. It allows the corporation to save money that will be reinvested in new equipment or used to finance the expansion of the business, with an eye towards even greater profits in the future. However, when the decision is based upon a malicious attempt to deprive the shareholder of his or her just share of profits (or force the shareholder to sell the shares at a discount), a court can order the corporation to declare a dividend.

6.Bring a lawsuit on behalf of the corporation when the corporate officers and directors refuse to do so because the lawsuit would be against the officers or directors.

If a corporation’s officers and directors are conducting business in a way that harms the corporation or in a way that diverts profits to themselves, they are breaching their fiduciary duties to the corporation. However, because the officers and directors also make the decision on whether the corporation will bring a lawsuit against those who have harmed the corporation, they are rarely ever going to decide to sue themselves. In such instances, an individual shareholder can bring a derivative lawsuit on behalf of the corporation itself, seeking to recover the damages suffered by the corporation from the officers and directors was caused the harm.

7. Participate (through ownership of shares) in corporate expansion and future corporate opportunities.

As a corporation becomes successful and takes advantage of new opportunities, a shareholder should be able to reap his or her share of the profits from this expansion. After all, the original shareholders made these successes possible by investing in the corporation. In some instances, however, the officers or controlling shareholders decide to form a second corporation to serve as a vehicle for expansion, and they exclude minority shareholders from participating in the second corporation. Legally, this is known as the “usurpation of a corporate opportunity.” When usurpation occurs, a minority shareholder can bring a lawsuit to recover his or her share of the opportunity.

If your corporation or limited liability company refuses to recognize your rights as a shareholder, you should contact the Shareholder Rights lawyers at Powers Taylor LLP. Many of the disputes between shareholders and the company can often be handled without expensive litigation if your lawyer is familiar with shareholder rights. As your counsel, the experienced Shareholder Rights attorneys at Powers Taylor will tailor an efficient, appropriate response to force the recognition of your rights as a stockholder.